The advantages and costs of dollarization local exchange rates

The advantages and costs of dollarization local exchange rates



2017/04/30 | 17:51
(Encyclopedia of this day , news | News Iraq ) -
Writer / Ihab Ali deputies

Since the collapse of the currency board system in Argentina in 2002, recommended a growing number of economists that the emerging economies to abandon their national currencies together, and then go to the dollarization of their economies, and provides for the concept of dollarization on the use of foreign currencies legal instrument alone to meet the obligations, debts and other functions of money , since about 21% of the member states of the IMF using the currency of other countries, and there are a number of other countries looking at the possibility of abandoning the national currency altogether, it has been termed the designation of this phenomenon in the name of dollarization, but the reality believes that the concept is broader than just use Dollar, but the currency is the use of another state legal tool to meet and carry out transactions.

Advantages of Dollarization

Claims to supporters of dollarization operations from the International Monetary Fund and other experts, that there are advantages or benefits, as there is the cost of operations dollarization for the countries of emerging economies, these experts believe that the most important benefits of dollarization is the removal of currency risk, and reduce the allowances of risk, and interest rates in the economies emerging, and will remain risks related to the state, and thus interest rates will remain close to fully than in developed countries.

While Others see that dollarization caused by the use of the US dollar benefits or the euro, encourage economic integration with major economies such as the United States or the European Union, compared to the situation when the retention of each emerging country national in its own currency, Valandemaj economic with these major economies can It encourages greater economic growth and the stability of the economic situation in the country applied dollarization.

Dollarization costs

The loss of profits issuing currency obtained by the government operations is the most expense borne by the economy, which is applied dollarization, there are two types of such alimony, it is the first of them in the need for the central bank to buy back the national currency in trading against the US dollar, for example, while the second type is to concession Central Bank for any returns arising from the issuance of the currency in the future, it is estimated that the dollarization of Argentina's economy requires $ 15 billion to buy back the currency Argentine peso, and about one billion dollars each year as a result of another loss of earnings release operations.

There is another important cost to the process of dollarization is the loss of the central bank function of last resort for lending to other banks operating when exposed to the crisis of temporary liquidity, and therefore, in the economy, which is applied dollarization, could not policy makers to respond to the banks when exposed to a temporary liquidity crisis, and also will not be able to restore confidence in the domestic banking system, and from countries that have implemented dollarization operations are Andorra in 1278, as it adopted as its currency both the French franc and Albazata Spanish, and also of Cyprus in 1974, and adopted the Turkish lira, as well as Ecuador in 2000, and adopted the US dollar, Bala Net of El Salvador in 2001, and adopted the US dollar, as well as other countries such as Panama, the Vatican and the Marshall Islands, East Timor, San Marino and others.

However, after the survey in the economic record of the group of countries that have applied dollarization, concluded the economic (Sebastian Edwards), that these countries have experienced low inflation rates compared to countries that have not applied dollarization, has represented the cost of this low inflation, slowing economic growth, but the small number of countries applied to the process of dollarization economists does not help to make estimates possible can by the costs and benefits of dollarization economy.

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